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1) Bob’s lawn-mowing service is a profit-maximizing, competitive firm. Bob mows lawns for $27 each. His total cost each day is $280, of which $30 is a fixed cost. He mows 10 lawns a day. What can you say about Bob’s short-run decision regarding shutdown and his long-run decision regarding exit?

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Answer:

Short run $250

Long run $280

Explanation:

Short-run:

TR = PxQ = 27x10 = $270

VC = TC – FC = 280 – 30 = $250

Bob should continue his lawn-mowing service in the short run because his total revenue is higher than his variable cost.

Long-run:

TR = $270

TC = $280

Bob should therefore exit the market because his total revenue is lesser than his total cost.

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